As a home seller in Austin, how much do you need to pay the buyer’s agent? If everything is negotiable, what is the best commission to offer to a buyer’s agent?
The concept of a buyer’s agent is prevalent in Texas real estate, and first time home sellers are often surprised to learn that it is the seller who pays for them. Real estate transaction costs are relatively high in the US, and when a seller looks back at their purchase they often remember that they paid substantial closing costs. When they come to sell their home they aren’t always expecting that a buyer’s agent gets paid typically around 3% of the sales price on top of what compensation the listing agent is asking.
I analyzed all house sales in the City of Austin in 2010 and found the following commissions offered on listings that sold:
- 94.6% offered 3% commission to the buyer’s agent
- 1.4% offered 2.5% commission
- 1.5% offered 5% commission – of these just under 70% were foreclosed homes
- The average was 3.05%
- 4% of sellers offered a bonus to the buyer’s agent above and beyond the commissions listed above
Just because 94.6% of sellers paid 3% doesn’t make it right, but it certainly helps to know what the competition is doing.
A quick look at buyer’s agents – which are described in the Texas Real Estate Commission’s Information About Brokerage Services form as:
“The broker becomes the buyer™s agent by entering into an agreement to represent the buyer, usually through a written buyer representation agreement. A buyer™s agent can assist the owner but does not represent the owner and must place the interests of the buyer first.“
So the buyer’s agent is paid for by the seller to negotiate on behalf of the buyer, which at first read sounds a little crazy. So why would any seller do that? Why wouldn’t they just ask their listing agent to represent the buyer and negotiate on behalf of the seller? Well, the same form which defines the responsibility of the buyer’s agent also points out that a single agent can’t really represent both parties in a transaction – a broker can, as long as the broker has a different agent assigned to each party. If you think about it, there’s no way a single agent could negotiate on behalf of both parties and get the highest price for the seller and the lowest price for the buyer at the same time (though this is how it works in England!). Actually fully-disclosed dual agency is still technically permissable in Texas, it is just frowned upon by many brokers due to liability implications, but that’s outside of the scope of this article.
Another thing that surprises sellers is just how many agents there are in the Greater Austin area – in a slower market like the one we’re in now, there are around 9,000 members of the Austin Board of Realtors, and more agents who aren’t participating in the MLS (the distinction is that the former are Realtors, and the latter are real estate agents). So if there were 20,062 MLS sales in 2010 (all single family property types) that means that the average agent represented less than 3 buyers in the year. What this amounts to, despite the top 10% of agents representing 90% of the buyers is that the odds are in most Austin markets, you’re unlikely to have the same agent bringing the buyer to the seller. (Of course it does happen with pocket listings and in supply starved neighborhoods like Mueller Austin, though even here, it’s not the norm)
Given that most typical transactions involve two agents – one for the buyer and one for the seller – it becomes apparent why many sellers do opt for a 3% commission to the buyer’s real estate agent. It keeps them competitive. In a perfect world, where agents really do live up to their fiduciary responsibility to put the interests of their buyer clients ahead of their own, then the amount offered wouldn’t impact the agents decision to show a particular home – not showing a 2% commission home and emphasizing the 5% commission foreclosure down the road.
Of course if you look at the written buyer’s representation agreements that an agent can use here in Austin, you see that they are worded so that the agent is due a certain commission which they first seek to get from the seller, and then from the buyer themselves. If this number is 3% and the seller is offering 5%, then the ethical agent has the job of discussing what to do with the extra 2%. If the seller is offering 2.5%, then the agent has to work out whether they are going to demand the extra 0.5% from the buyer or forgive it. Given that most buyers expect not to pay anything to their agent, this can be a challenge.
The flip side to the “3% makes a level playing field” argument is that the way people find their next home is changing. According to the National Association of Realtors 2010 survey of buyers and sellers, almost a third of purchased homes were found for the buyer by their agent (one more reason to incentivize the agents in an imperfect world with a higher commission). Every year this number goes down a little, and the number of people finding the home they actually buy through research on the internet (it’s hard to throw a rock on the internet without hitting three real estate sites these days) goes up. As time goes by and as the number of transactions increases, in a young, technically adept market like we have in Austin, I would expect the number of sellers offering less than 3% commission to increase.
There is one seller trying this approach out in Mueller right now, and time will tell how it works out for them.